Penny stocks, defined as those trading under $5 per share, offer unique opportunities. With low prices and the potential for high percentage returns, it’s understandable why penny stocks attract interest from new traders. However, diving into penny stock trading does involve substantial risks. Becoming well-informed is essential for anyone considering buying these speculative investments. There are also some advantages to keep in mind when weighing if penny stocks should have a place in your portfolio.
Significant Growth Potential
Starting from such low price points, penny stocks have the potential to deliver exceptionally high returns on a percentage basis. Even a move from $0.10 to $0.50 per share translates into a 400% return. Rapid price spikes can and do happen with thinly-traded penny stocks. The promise of doubling, tripling, or making even larger percentage gains on small investments lures new traders in.
Low Cost to Get Started
With some cheap stocks trading for just pennies per share, you don’t need a lot of capital to buy a position. You can purchase thousands of shares in a penny stock for just a few hundred dollars. When first starting out, buying low-priced stocks allows you to spread small amounts of capital across multiple companies. This helps reduce the damage potential of any single trade that goes south. Starting small also helps new traders manage risk and learn the ropes.
Higher Leverage Potential
Those with brokerage accounts permitting margin trading can increase leverage by buying penny stocks. Using borrowed money from the broker to fund trades increases potential profits but also increases downside risk exponentially. This allows investors to trade with double or triple the relative size of their cash balance. Of course, margin trading is extremely risky and should only be used by sophisticated traders in limited circumstances.
Substantial Risks Involved
While the prospect of stellar returns attracts interest, penny stocks also carry substantially higher risks than regular stocks. There are several hazards to consider before investing in penny stocks:
Greater Volatility
With small market caps and often limited publicly available information, penny stocks are extremely volatile at times. Jumping in and out is common with penny stocks, leading share prices to vary dramatically in short periods. Monitoring positions closely is mandatory with such unpredictable investments.
Lack of Liquidity
Thinly traded penny stocks can be almost impossible to sell when you want to get out. Without an active market and buyers bidding, you may end up stuck holding shares that continue falling in hopes a buyer eventually emerges. Liquidity risk is tremendously higher with most penny stocks.
Potential for Fraud
The lack of financial reporting requirements adds extra risk to penny stocks. Company fundamentals may be distorted or outright fraudulent in some cases. Scams designed to artificially pump penny stock prices before insider selling occurs are distressingly common. Careful due diligence is mandatory before buying any thinly traded penny stocks.
While penny stocks provide a low-barrier entrance point and visible upside potential, they undeniably bring amplified risk of losses. Keep position sizes small and set stop losses on all penny stock trades. Only risk what you can truly afford to lose with these extremely speculative securities.
Penny Stocks To Watch
Still here? Good! Now let’s talk about some of the most popular penny stocks today and get a better understanding of potential catalysts at play. Then you can decide if they live up to the hype and are worth adding to your list of penny stocks to watch.
- Oatly Group (NASDAQ: OTLY)
- Aclaris Therapeutics (NASDAQ: ACRS)
- Ardelyx Inc. (NASDAQ: ARDX)
- Phio Pharmaceuticals Corp. (NASDAQ: PHIO)
- Rent the Runway, Inc. (NASDAQ: RENT)
1. Oatly Group (OTLY)
Oatly Group is known as the original oat drink company globally. It has been making significant strides in its operational and financial strategies, focusing on achieving profitable growth by 2024. In line with this, the market has put a stronger focus on financial performance.
Oatly reported a revenue increase of 2.5% to $187.6 million. However, on a constant currency basis, revenue remained flat compared to the previous year. The company experienced a significant increase in gross margin to 17.4%, and a notable net income turnaround to $44.0 million from a net loss of $107.9 million in the previous year. Adjusted EBITDA loss improved significantly, indicating a positive trend in profitability.
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Oatly updated its 2023 outlook, expecting revenue growth at the lower end of its 7-12% range and projecting fourth-quarter gross margins in the mid-20%s. Despite ongoing global uncertainties, the company remains optimistic about delivering positive Adjusted EBITDA in the fiscal year 2024.
2. Aclaris Therapeutics (ACRS)
The clinical-stage biopharmaceutical company develops novel drugs for immuno-inflammatory diseases. Aclaris has a diverse portfolio of drug candidates, primarily addressing unmet medical needs in this niche. One of the recent catalysts giving ACRS stock a bump is post-market news on Tuesday.
Aclaris announced an exclusive patent license agreement with Sun Pharmaceutical Industries. The agreement grants Sun Pharma exclusive rights to certain patents for deuruxolitinib and other forms of ruxolitinib. These drugs are used to treat alopecia areata and androgenetic alopecia. The deal includes a $15 million upfront payment, plus regulatory, commercial milestones, and royalties. Aclaris licenses these patents from a third party and owes a portion of the proceeds to them.
On the heels of this news, ACRS stock jumped during post-market trading. Coincidentally, the move also comes just a few weeks after HC Wainwright cut its price target from $43 to $9. Despite this as fact and the firm maintaining a Buy rating, the $9 ACRS stock price forecast is still considerably higher than current levels.
3. Ardelyx Inc. (ARDX)
Ardelyx, Inc. is specializing in developing innovative medicines for significant unmet medical needs. It recently announced that the U.S. FDA granted Orphan Drug Designation to its XPHOZAH® (tenapanor) for treating pediatric hyperphosphatemia.
XPHOZAH is a first-in-class medication that blocks phosphate absorption. It’s primarily used to reduce serum phosphorus in adults with chronic kidney disease on dialysis. Hyperphosphatemia, characterized by elevated phosphate levels in the blood, commonly affects patients with chronic kidney disease, especially those on maintenance dialysis. The Designation supports the development of drugs for rare diseases or conditions and includes benefits like market exclusivity and exemptions from certain fees.
What does this mean for Ardelyx? The FDA’s designation for XPHOZAH acknowledges its potential in treating pediatric hyperphosphatemia. It could lead to potential growth, therefore positively affecting its prospects. But it’s important to note that if XPHOZAH encounters challenges in clinical development or market penetration, or if competitive treatments emerge, it could negatively impact the company.
Wedbush recently reiterated its Outperform rating on the penny stock. Meanwhile, it maintains a $9 target.
4. Phio Pharmaceuticals Corp. (PHIO)
This is another clinical-stage biotechnology company. Phio’s focus is on developing immuno-oncology therapeutics using their proprietary INTASYL™ RNAi technology. This technology enhances the effectiveness of immune cells in destroying tumor cells without specialized drug delivery systems.
Shares of PHIO stock exploded afterhours on Tuesday. There weren’t any immediate headlines to pair with the move. However, some are looking back at recent news for clues. Last month Phio Pharmaceuticals announced the enrollment of the first U.S. patient in a Phase 1b clinical trial of PH-762. This compound, part of their INTASYL™ platform, aims to reduce PD-1 expression, a protein that inhibits T cells from killing cancer cells.
The trial will assess the safety, tolerability, and tumor response of PH-762 in treating skin cancers like cutaneous squamous cell carcinoma, melanoma, and Merkel cell carcinoma. The treatment involves four weekly intratumoral injections of PH-762, with escalating doses being tested across different patient cohorts. No further developments have been announced related to this news. However, PHIO stock is one of the most active names on the list of penny stocks during post-market hours on Tuesday.
5. Rent the Runway, Inc. (RENT)
Possibly renowned as the world’s first and largest shared designer closet platform, Rent the Runway offers a unique service that allows customers to rent designer clothing and accessories. The company aims to disrupt the traditional fashion industry by providing an innovative, sustainable alternative to buying and owning clothing. But the only thing that has been a disruptor this year is RENT’s stock price and for all the wrong reasons. Shares have imploded from nearly $5 in Q1 to under $0.50 just a few weeks ago.
Will that begin changing? It seems like there is some optimism stemming from the latest RENT stock earnings results. In their third quarter of fiscal 2023, Rent the Runway reported a revenue of $72.5 million, which represents a 6.3% decrease from the previous year. The company’s total active subscribers decreased slightly, while the average active subscribers saw a 4% increase year-over-year.
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Gross profit for the quarter was $25.2 million, a decrease from the previous year’s $31.8 million, and the net loss was $31.5 million, slightly better than the $36.1 million loss in the same quarter last year. Adjusted EBITDA was $3.5 million, down from $6.6 million in the third quarter of fiscal 2022. For the fourth quarter of fiscal 2023, Rent the Runway expects revenue of at least $74 million and an adjusted EBITDA margin of at least 7%. For the fiscal year 2023, the company forecasts revenue of at least $296.4 million and an adjusted EBITDA margin between 7% to 8%.
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